The promotion of Public Private Partnerships is a potential solution to housing demand in the coming years

By Benjamin Cullum
Affordable housing has been somewhat of a catchphrase in recent times within the Sultanate. However, this has not been the exclusive experience of Oman: throughout the last five years or so, as the global economic climate declined from its 2007 / 2008 highs, the issue of affordable housing has thrust itself into the limelight due to the increasing inability of some people to afford to purchase property. There are several obvious reasons for this, including the difficulties in obtaining credit the world over, tipping a large number of individuals / families from the group of those who could afford to purchase a property into the group of those who could not.
The term “affordable housing” can mean many different things: there can be connotations of social housing as well as assisted housing schemes. In this article I am merely refering to the ability to afford housing. This crosses many different sectors of society: the property that can be ‘afforded’ by the man earning RO6,000 per month is clearly different from the property that can be ‘afforded’ by the man earning the current minimum wage of RO325 per month. Although many of the issues facing each sector can be classed as the same, it is the majority of society that this article focusses on.
The latest Statistical Year Book published by the NCSI (National Center for Statistics and Information) for 2013, published in November this year, shows that of the 172,066 Omanis registered with PASI (Public Authority for Social Insurance) as working in the private sector, 149,140 are registered (86.7 per cent) as earning a basic salary of RO500 per month or less. If we assume that the basic salary is 50 per cent of the gross salary, then 86.7 per cent of the Omanis working in the private sector take home RO1,000 per month or less.
Putting this into context and considering the financial industry, various safeguards have been put in place by the Central Bank of Oman (CBO); the most pertinent of which for a discussion on affordable housing include the cap within mortgage lending on loan to values set at 80 per cent, the maximum term of a mortgage being capped at 25 years and the maximum monthly repayment of a loan equating to 60 per cent of the gross salary.
For illustrative purposes, taking a very basic mortgage repayment scheme, assuming the maximum term of 25 years, the maximum salary of RO1,000 per month, maximum repayment allowed of RO600 per month (60 per cent of salary), maximum loan to value of 80 per cent, 5 per cent pa interest rate; the maximum price that can be paid for a property is calculated to be a shade under RO130,000. This would also require equity to be put forward of approximately RO26,000.
Below is a table setting out the maximum loan amounts that can be ‘afforded’, along with the associated minimum equity requirements for a variety of gross salaries:
The family is an extremely important institution within Oman and it is very common for young parents to continue to live with their own parents for a period of time. This period appears to be extending as the problems associated with the above table are brought forward: the ability for a household which earns an aggregate gross salary of, say RO650 per month to set aside RO390 (at the maximum 60 per cent ratio) to purely pay the mortgage is extremely difficult with all other living expenses added in. Even if this can be budgeted for, the required equity, equating to approximately 26 months of aggregate gross salary, is proving equally challenging to raise.
As stated previously, affordability is determined by the different sectors of society, in the table above the maximum that can be afforded by different income brackets is set out, the table below gives an indication of the types of property which fall within a variety of current prices:
The appetite for apartment owner-occupation by Omanis is limited, in contrast to the desire for the one off purchase of a family home to be lived in for life is very high. To achieve this, Omanis have naturally gravitated towards the purchase of land plots and the construction of their own properties. This significantly cuts down the price to be paid as there is no developer’s profit; the downside however is the period taken to construct the property and therefore the need to be housed elsewhere whilst the property is under construction.
This tendency to build stand-alone properties is furthered by the government’s policy of granting land plots to eligible Omanis and has helped to provide affordable housing to the market.
Throughout the GCC the difficulties in obtaining finance during the initial crisis have been exacerbated in the last few years by the sheer weight of numbers: taking Oman as the example, the Statistical Year Book published by the NCSI for 2013, shows that 67.5 per cent of the Omani population are under 30, which is increased to 76 per cent of the population under 35. This extremely young demographic is responsible for placing enormous pressure on the housing market: as the younger generations are ageing, new families are being created with a desire for their own home. For the foreseeable future, this trend is set to continue as the 935,362 (44.7 per cent of the population) 0-19 year olds start having families of their own over the next 25 years. Due to the increases in healthcare, education and general affluence throughout the Sultanate, the local population will continue to rise at high rates over the medium term.
The promotion of Public Private Partnerships (PPP) is a potential solution to housing demand in the coming years and has been taken up in a variety of guises to a greater or lesser extent throughout the GCC countries. Attracting developers through PPP schemes can only be considered as the beginning of the solution to affordable housing throughout the region. Across the GCC, significant pressure on basic housing supply is created by the traditional desire for a large house. When considered in combination with the high proportion of low income earners, rapidly rising land prices between 2005 and 2008 and high financing costs, the ability for developers to create a product that met demand and was affordable was non-existent.
Despite the reduction in land prices from the highs of 2008 and the ebbs and flows of general construction costs, the ability to provide a product that will sell into the market at a price level attractive to the developer is still a hard task. Potential solutions could include more sophisticated finance / ownership arrangements such as lease to own or forms of equity ownership with the end user. In order for these to work, however, the developer must have a greater appetite for risk, the ability to take a longer investment option and access to favourable finance arrangements themselves.
What is clear, is that with any solution, the various governments of the GCC will need to take an active role in providing innovative options. The good news is that this has begun with affordable housing being seen as a priority within all GCC countries and opportunities are starting to present themselves to developers and end users alike.